The updated pension annual allowances for NHS professionals – still a need to be careful?
News in the spring budget about the updated lifetime and annual allowances have been largely welcomed by those saving for retirement, especially people working in public services, such as the NHS. Westcotts advises many medical professionals at all stages of their careers including those who have retired.
One topic we are regularly quizzed on is the NHS pension scheme, the lifetime allowance and the annual allowance, more specifically the tapered (or reduced) annual allowance based on one’s taxable or ‘adjusted’ income during a financial year.
My colleague Andrew Brown recently wrote about the lifetime allowance and the excellent planning opportunities for all. You can read his blog here.
However, this article will focus on the new £60,000 annual allowance for pension contributions or annual input accruals.
Surely a much higher annual allowance is a good thing? Well, as with all taxation matters, the devil is in the detail and I will take you through what could be considered a typical scenario. We will also cover the matter of starting or restarting personal or private pension contributions again, alongside active NHS pension scheme membership.
Keep your savings statements safe
If you are a member of the NHS pension scheme for example, the annual input figure against the annual allowance is typically published in your annual savings statement and the input figure from the previous scheme or tax year usually comes out in the autumn.
It is only then (unless you have precisely worked it out yourself of course) that you know whether or not you have a potential tax charge on your pension accrual for the previous year. It is worked out on how much the total value of your pensionable or reckonable service is worth, not what was paid in pounds and pence into the pension scheme membership throughout the year.
Inflation is key
The opening value (a multiple of your pension scheme membership to date) is measured against the closing value at the end of the scheme year. The opening value is also uprated by CPI and the difference is your input figure.
It is quite fitting that the Treasury uplifted the annual allowance in 2022/23 (a period of exceptionally high inflation – over 10%) because one could argue that it suits their narrative well. Unless you had a career defining pay award during this time, it is unlikely that many would get anywhere near breaching the standard annual allowance of £60,000.
If we took an NHS consultant in the 2015 Pension Scheme, for example, whose pensionable earnings increase from £120,000 to £130,000 in the year having been awarded a clinical excellence award or having done many extra hours of overtime, this person may also be still funding an added years contract in the 1995 NHS pension scheme as well.
If this person has accrued eight years now in the 2015 scheme, the estimated pension input amount in this tax year could be in the region of £33,000+. The added years may well be in the region of £5,000. Added together this would be within the new annual allowance and there would be a balance to use for a carried forward relief in the next three tax years.
If this person had achieved the same in their career heights during the 2016/17 tax or scheme year however (a period of very low comparative inflation) then the 2015 NHS pension accrual alone would have had an estimated annual input figure of over £60,000. Same career and salary figures, same length of service, the difference is the inflation related difference between the pension scheme membership opening and closing values, a factor no one can really influence or control.
So, while lower inflation will be welcomed by many, the problem to do with pension accrual and taxation charges with public sector pension schemes is likely to return. The use of any unused 2023/24 pension annual allowance may therefore be vital for many NHS pension scheme members and it is important that this is recorded for future use if required.
Public sector pay may also drift upwards with inflation, but there does not appear to be any plans to raise the £60,000 pensions annual allowance any further for now.
The tapered annual allowance
The issue of the tapered annual allowance remains. The bar is much higher now, so you would have to have an ‘adjusted’ income of up to £360,000 for the standard annual allowance to be reduced all the way down to £10,000; but if your private practice earnings alongside your NHS salary for the year starts to reduce or taper down, your standard annual allowance, coupled with lower inflation figures that may come in the future, then you could be close to breaching your tapered annual allowance again.
Time to (re)start personal pension contributions again?
Finally, we have been asked by some NHS pension scheme members if now is the time to restart private pension contributions, something that has really been off the table since 2015/16 when the annual allowance was reduced down to £40,000.
The answer is that it depends once again. It may be useful or perhaps necessary to use unused annual allowance to carry forward into the next three tax years, especially if one’s input figure starts to get towards £60,000 or over again if inflation falls.
Care also needs to be taken about predicting what your NHS pension scheme annual input figure is as the official figures are always published in the next scheme year. Over funding pensions once again can result in unwelcome income tax charges.
So, while the Treasury has appeared to have solved one problem, the issue about pension accrual and taxation remains a complex one, especially for NHS pension scheme members. If you find yourself in a position whereby your private earnings are likely to be higher (fulfilling the NHS backlog with private work) then you could also consider speaking to your Westcotts accountancy team about your options, perhaps to consider the use of a limited company instead of being self-employed.
We also anticipate the results of the age discrimination case (the McCloud judgment) to be implemented in the autumn of this year as well which could have an impact on annual pension input figures for some public sector pension scheme members.
At Westcotts, our team of advisers have been working with the annual allowance pension rules since they were originally introduced and varied and then varied again.
We can offer a free initial consultation and guide you on what to look out for and what to be prepared for in the future so that you can get on with your career and potentially steer clear of any taxation traps, especially if inflation starts to fall and the annual pension scheme input figures start to rise again.
Westcotts Chartered Financial Planners is a trading style of Westcotts Financial Management Ltd which is registered in England and Wales, Company No. 4342122. Westcotts Financial Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate tax advice.’ Please note this information does not offer specific personal advice. The information is based on our understanding of current taxation, legislation and HM Revenue & Customs practice and Tax treatment depends on individual circumstances, all of which may be subject to change.